California Supreme Court rules on dual agency case

The state supreme court affirmed a lower court’s ruling that listing agents owe fiduciary duty to buyers when both buyers and sellers are represented by the same brokerage.

The California Supreme Court has upheld an appeals court decision finding that a listing agent who participated in the 2007 sale of a Los Angeles home for $12.25 million owed fiduciary duties to the buyer because both buyer and seller were represented by the same brokerage.The case concerns Chris Cortazzo, an agent in Coldwell Banker’s Malibu West office, who in November 2007 showed his listing for a custom Malibu hometo Hong Kong-based millionaire Hiroshi Horiike.

During the showing, Cortazzo gave Horiike an MLS listing sheet and a copy of a one-page color flier advertising that the home had 15,000 square feet of living area.

About a year and a half after Horiike purchased the home, he discovered that a 1998 building permit for the property listed its square footage at 11,050.

In November 2010, Horiike filed suit against Coldwell Banker and Cortazzo for negligent representation, breach of fiduciary duty and other claims. Namba was not named in the suit.

(A more detailed background of the case can be found here.)

Do both listing agent and buyer’s agent have fiduciary duty to buyer?

Horiike’s attorneys argued that when a brokerage becomes a dual agent, then both the listing agent and the buyer’s agent are responsible for ensuring the brokerage satisfies its duties to both of the firm’s clients — including a fiduciary duty to investigate facts that may not be obvious from a brief visual inspection of the property.

In a 2012 trial, the court ruled in favor of Cortazzo and Coldwell Banker, ruling that Cortazzo did not owe a fiduciary duty to Horiike.

But in April 2014, an appeals court overturned that decision.

“The buyer contends that the salesperson had a fiduciary duty equivalent to the duty owed by the broker,” the appeals court said.

“We agree. When a broker is the dual agent of both the buyer and the seller in a real property transaction, the salespersons acting under the broker have the same fiduciary duty to the buyer and the seller as the broker.”

The court sent the case back to a lower court for a new trial, saying that the jury’s findings do not resolve whether Cortazzo breached his fiduciary duty to Horiike.

Back to trial

“As this case comes to us, it presents a single, narrow question concerning the associate licensee’s duties to the buyer in the transaction: whether the associate licensee owed to the buyer a duty to learn and disclose all information materially affecting the value or desirability of the property, including the discrepancy between the square footage of the residence’s living area as advertised and as reflected in publicly recorded documents,” the court said in its opinion.

“It is undisputed that Coldwell Banker owed such a duty to the buyer.

“We now conclude that the associate licensee, who functioned on Coldwell Banker‘s behalf in the real property transaction, owed to the buyer an ‘equivalent’ duty of disclosure under Civil Code section 2079.13, subdivision (b). We accordingly affirm the judgment of the Court of Appeal.”

Inman has reached out to Coldwell Banker and Cortazzo for comment and will update this story as comments are received.

Possible implications

In petitioning the court to review the appeals court decision, Cortazzo, Coldwell Banker, and the firm’s supporters — including the California Association of Realtors — contended the appellate court opinion could have dire effects on the real estate industry.

Deprive buyers and sellers in “intra-firm transactions” of the “undivided loyalty of an exclusive agent.” “The salespersons will owe fiduciary duties to parties whose interests inherently conflict,” wrote the attorneys.

Force agents to disclose “sensitive information about the client’s motivations or the salesperson’s personal beliefs” to the “other side” in the transaction.

Limit the pool of properties available for buyers should large firms decide to avoid in-house deals altogether.

Raise transaction costs due to increased litigation and a consequent rise in insurance premiums.

But now that the decision has come down, CAR, at least, does not believe that these predictions will come about, June Barlow, vice president and legal counsel for the trade group, told Inman.

“We were most concerned about an expansive ruling that might have been broader than the facts of this case. Since they kept it to the facts of this case, it’s not as remarkable as we were concerned it could be,” she said.

She noted that the court said Cortazzo’s fiduciary duty of disclosure to the buyer was “strikingly similar to the nonfiduciary duty of disclosure that Cortazzo would have owed Horiike in any event.”

The court also said that “Even in the absence of a fiduciary duty to the buyer, listing agents are required to disclose to prospective purchasers all facts materially affecting the value or desirability of a property that a reasonable visual inspection would reveal.”

Since that tracks with current law on disclosure duties, Barlow said she doesn’t think much will change in terms of the conduct expected of agents.

“It is not news that you have to disclose material facts. [Agents] have to do that whether or not there is an agency relationship,” she said.

Cortazzo did warn the buyer that the square footage was not guaranteed and advised the buyer to verify it independently, she said. It will be up to a jury to decide whether Cortazzo fulfilled his fiduciary duty by doing so, according to Barlow.

“A reasonable jury could find that nothing else was required,” she said.

Court addresses some brokerage concerns, but not others

The California Supreme Court did not dispute Coldwell Banker’s concerns that charging associate licensees with the same duties as their brokerages would force those licensees into a dual agency situation in which there is a potential for conflicts of interest, but did say “the narrow disclosure duty at issue in this case creates no such conflict.”

The court said it expressed no view about whether or not Cortazzo breached his fiduciary duty to the buyer, but that disclosing discrepancies in the home’s square footage and advising the buyer to hire a specialist to verify the square footage “would not have required Cortazzo to reveal any confidential information he had obtained from the [seller], nor would it otherwise have compromised his ability to fulfill his fiduciary obligations toward the [seller].”

The court acknowledged Coldwell Banker’s concerns about depriving clients of “the undivided loyalty of an exclusive salesperson” and charging salespersons with “a duty to harm their original client” by disclosing confidential information to the other side.

“These are significant concerns, but they are also concerns inherent in dual agency, whether at the salesperson or the broker level,” the court said.

“Although the [California] Legislature was certainly aware of these concerns when it enacted the disclosure statute, it opted not to address them directly.

“In approving the practice of consented-to dual agency, however, the Legislature undoubtedly understood that the dual agent‘s loyalty must extend to both parties, and that it cannot bear any fiduciary duty to one party that requires it to breach its duty to the other party.”

The court added that the legislature could address uncertainties about the scope of a dual agent‘s fiduciary duties in other contexts “by, for example, adopting legislation to uncouple associate licensees‘ duties from those of the brokers they represent” — as other states have done in what is called “designated agency.”

“But as presently written, the statute provides no basis for distinguishing between a broker‘s duty to learn of and disclose all facts materially affecting the value or desirability of the property and its associate licensee‘s duty to do the same,” the court said.

When asked whether CAR planned to propose such legislation, Barlow said, “That’s going to be up to our directors. That’s not something I can comment on.”

Protecting unwary buyers

The buyer plaintiff and supporters of the appeal’s court decision — including the National Association of Exclusive Buyers Agents — argued that the decision is based on a statute whose meaning is “unambiguous” and was intended to “protect consumers from salespersons with greater knowledge and bargaining power.”

“The [California] Legislature’s purpose in enacting the statute was to provide real estate licensees with a comprehensive declaration of their duties and for consumers to be aware of the inherently conflicting duties in a dual agency situation,” Horiike’s attorneys said in response to Coldwell Banker’s petition.

“A motivating factor that originally propelled this legislation was the fact that intra-company sales yield the greatest net profits for brokerages, thus prompting the potential for abuse,” the buyer’s attorneys added.

They asserted that only a broker, not a salesperson, contracts with a buyer or seller and that a salesperson’s duties flow from the broker.

“When a broker like Coldwell Banker chooses to represent both parties to a sale, it must meet its fiduciary duties to both sides. And it can do so only if the salesperson best situated to fulfill those duties is also required to do so,” they said.

“But defendants do not explain how Namba’s purported failure to discharge her fiduciary duty would excuse Coldwell Banker from its duty to disclose material information that may have been known only to Cortazzo, who was also its agent in the transaction.

“A broker cannot discharge a duty to disclose information known only to its associate licensee except through the licensee himself.”

Kim Kahl, executive director for NAEBA, told Inman the trade group is pleased by the California Supreme Court’s decision.

“Dual agency has long been problematic for consumers, leaving them without full representation in what is one of the largest monetary transactions of their lives,” she said.

“This case simply highlighted the pitfalls for consumers and agents alike and illustrates why our members only represent buyers.”

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